Business Update with Mark Lacter

Bankruptcy in the Southland; American Apparel's troubles

KPCC business analyst Mark Lacter talks about bankruptcy in Southern California; he also talks about the American Apparel's money troubles.

Steve Julian: On Tuesdays we talk about the latest business stories with Mark Lacter. Mark, given the unemployment figures throughout southern California, are more people filing for bankruptcy?

Mark Lacter: They are Steve – last month the U.S. Bankruptcy Court for the Central District of California (that covers much of the area) reported 13,000 filings by individuals and businesses - that's up 31 percent from a year earlier - the highest level in five years. But bankruptcy is not as popular an option as it used to be. The laws were changed in 2005 in order to keep a lid on the deadbeat borrowers, which made sense, but in the process it's become a lot more expensive to file - and also more complicated.

Julian: How so?

Lacter: Filers have to go through credit counseling period, and they have to supply lots of financial information - all of which tends to delay the process, and in the meantime the debts keep piling up. But the biggest reason for not filing is that it doesn't always do much good. For example, it won’t protect you from going into foreclosure. You would still have those debts. Not only that, a bankruptcy filing stays on your credit rating for 10 years; a foreclosure filing stays on your credit rating for seven years. That’s why folks decide to walk away from their homes and skip the bankruptcy.

Julian: So people are being calculating...

Lacter: That’s right. The real answer would be to give a bankruptcy judge the authority to modify mortgage debt, making it part of the regular bankruptcy proceeding. But judges don't have that power, even though, strangely enough, they do have the power to modify mortgages on a vacation home. So Steve, if you have that weekend getaway in Malibu, you're all set. Everyone else, get in line. It's just a symptom of the difficulty that people in financial distress have had in straightening out their lives. Government programs tend not to be designed or managed very well. So folks end up going around the system instead of having the system work for them. Not great.

Julian: We've talked about American Apparel off and on over the years - is the company on the verge of going out of business?

Lacter: Well, make no mistake, American Apparel is one messed up company - and its future will be a big deal for the local economy, especially the economy in downtown Los Angeles. This is a very large business - several thousand garment workers in L.A., plus almost 300 retail locations - and what's important to remember is that American Apparel has made a commitment to manufacture its products in the U.S., and not overseas. That's very unusual.

Julian: So, what's the problem?

Lacter: The problem is that American Apparel isn't run very well. It's been losing money, it's taken on way too much debt, it probably won't be able to file its quarterly financial results on time (a huge no-no for a public company), and if all that isn't enough it's under investigation by the SEC concerning its switch of auditing firms. Oh, and its stock is trading at 74 cents a share, which tells you something about its appeal on Wall Street. On the other hand, American Apparel has become a huge global brand, thanks the merchandise itself and also thanks to its risqué marketing campaign that has a lot of pretty young women showing up on billboards, usually with very few clothes on.

Julian: So... bankruptcy?

Lacter: The company says it has no plans to file, and even though things look bleak, there are still steps that can be taken, whether it's cutting back expansion plans or finding a white knight that would be willing to buy a big stake. The one step that could really help is bringing in a new chief executive to replace Dov Charney, the controversial founder of the company. Now, Charney is truly a success story, but like a lot of entrepreneurs he's not been able to manage a business that generates more than half a billion dollars in sales (it's a big transition), and also like a lot of entrepreneurs, he simply refuses to give up the reins. As long as he's running the show, investors are likely to steer clear.

Julian: Mark Lacter is a contributing writer for Los Angeles Magazine and writes business blogs at LA Observed.com and at kpcc.org.


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